SYDNEY BHP Billiton (BHP.AX) (BLT.L) is forging ahead with plans to boost iron ore output as low cost mining giants carve out a larger market share and undercut competitors struggling with slower growth from top buyer China.
The world's biggest miner joined rivals Rio Tinto (RIO.AX)(RIO.L) and Fortescue Metals Group (FMG.AX) in pressing on with plans to dig up more ore despite risks stemming from cooling industrial activity and demand for steel in China.
Miners have in recent months been scaling back expansions and spending, raising concerns a decade-long mining boom in Australia is dead.
BHP has been flagging for several months that demand growth in China for steel making materials would slow over the next few years and now sees China's economy growing at a slower 7-8 percent this year and around that level over the next 10 years.
"In effect, what this means is that the record prices we experienced over the past decade, driven by the 'demand shock', will not be there to support returns over the next 10 years," BHP Chief Executive Marius Kloppers said in notes for a speech in Brisbane.
The global iron ore market is expected to grow by 650 million metric tons this decade, he said, below the 800 million metric ton rise recorded in the previous decade.
Iron ore prices have rebounded to around $114 per metric ton from $87 in September thanks mainly to Chinese steel mills restocking depleted inventories. That's still well under the near-$200 a metric ton ore fetched in early 2011.
"(The) commodity price boom is over and no one can deny it. We've now moved to the next phase of the cycle, which is an absolute focus on capacity and cost structures," Australia's resources minister, Martin Ferguson, told Reuters.
In its September-quarter activities report, BHP outlined plans to boost output by 5 percent by the end of June 2013, relying on the higher tonnages to reduce costs and cushion the impact of lower selling prices. BHP said quarterly iron ore production was steady at 39.8 million metric tons.
Over the past decade China has replaced Japan as BHP's biggest customer, particularly for iron ore, which can be mined more cheaply in Australia than at home.
Some 100 million metric tons of low-quality Chinese production had become unprofitable in the past month or two and is ripe for closure, making room for more imported ore, even in a falling market, mining executives estimate.
In Australia, Fortescue, Atlas Iron (AGO.AX) and BC Iron (BCI.AX) are also lifting output, though they face higher costs.
BHP and Rio Tinto boast some of the world's lowest production costs of around $20-$30 per metric ton. That provides a strong competitive advantage against domestic Chinese production, which can run as high as $100 per metric ton.
Australia's iron ore exports to the world's biggest steelmaker have grown at more than double the pace this year of China's total iron ore imports. In the first eight months of 2012, official data showed China imported 8.7 percent more iron ore than a year ago. But imports from top supplier Australia rose by 20 percent to 222.7 million metric tons. <MTL/CHINA3>
Australian miners are also benefiting from restrictions on iron ore exports from India, which is attempting to keep its own steel industry well stocked with raw materials.
A shift away from once-a-year pricing of ore in favour of shorter term contracts also means lower returns on sales. That's because the more ore is sold at spot, the less smaller suppliers can compete with the mega-producers -- namely Vale (VALE5.SA), Rio Tinto and BHP who enjoy vast economies of scale and together control more than 70 percent of the global seaborne market.
COUNTING ON DEMAND
"The producers are obviously counting on demand remaining up," said Fat Prophets mining analyst David Lennox. "But the risk is if the pace of the slowdown in China GDP accelerates, creating less need."
Rio Tinto on Tuesday said it was sticking with its 2012 production target of 250 million metric tons after reporting September quarter output rose 5.6 percent from a year ago.
Fortescue, which also runs mines in the Pilbara area of Australia's northwest, plans to decide by December whether to restart work on its Kings mine, which could nearly double its output in two years.
But the outlook is uncertain as China's annual economic growth probably slowed for a seventh straight quarter in the July-September period to the weakest since the depths of the global financial crisis, a Reuters poll showed. China releases its GDP figure on Thursday.
COPPER OUTPUT UP
Outside of iron ore, BHP said its strategy of wide diversification in commodities was paying off.
The world's No.2 copper producer said production in the quarter rose 24 percent from a year ago, with its majority-owned Escondida mine in Chile headed for a 20 percent production increase in fiscal 2013.
Also, coal output rose by 20 percent during the September 2012 quarter at its collieries jointly owned with Mitsubishi Corp.
Citi in a note said BHP's production data was in line with its estimates and maintained a buy recommendation on the stock, targeting A$36 a share. BHP shares were up 1.2 percent at A$33.48 at 0320 GMT.
That doesn't mean big miners won't feel the pinch.
Citi estimates BHP's net profit will tumble to $12.8 billion in fiscal 2013 from $17.1 billion the previous year.
(Additional reporting by Sonali Paul and Manolo Serapio Jr in Singapore.; Editing by Ed Davies)